Excerpt: - - at the time of making the assessments for the assessment years 1968-69 and 1969-70, the ito failed to notice these receipts. 2 as well, it has not been properly framed inasmuch as the assessee had not claimed deduction on account of its sales tax liability but had claimed deduction on account of its purchase tax liability. the appeals to higher authorities or courts taken by the assessee, contesting its liability to pay the sales tax, ultimately failed. it was further held that the fact that the assessee was contesting its liability to pay the sales tax or that it failed to debit the liability in its books of account did not debar it from claiming the same as a deduction either under section 10(1) or under section 10(2)(xv) of the indian i......tribunal in the present cases that the assessee did not claim any deduction on account of its sales tax liabilityand the only question for consideration in these cases is whether the amount in question constituted trading receipts of the assessee or not is perverse ?' 5. question no. 1 is not happily worded. the assessee had not claimed exemption in respect of purchase tax realisations but it had claimed deduction in respect of the same for the reason that it was a statutory liability as the assessee was to pay the purchase tax realised to the state govt. therefore, in question no. 1, in respect of the expression 'exemption', we would read the expression 'deduction'. as for question no. 2 as well, it has not been properly framed inasmuch as the assessee had not claimed deduction on.....

Judgment:

Rastogi, J.

1. This is a reference under Section 256(1) of the I.T. Act. The assessment years involved are 1968-69, 1969-70 and 1971-72. The assessee, M/s. Poonam Chand Trilok Chand, Bareilly, is a partnership firm and carried on business in foodgrains as commission agent and on its own. During the previous years relevant to the years under consideration the assessee had realised Rs. 1,46,302, Rs. 92,870 and Rs. 40,570 as purchase tax from its customers respectively, The assesses did not include these amountsin its profit and loss account for any of these years. At the time of making the assessments for the assessment years 1968-69 and 1969-70, the ITO failed to notice these receipts. Subsequently, he initiated proceedings under Section 147(b) of the Act and framed reassessments under Section 144/147(b) of the Act treating these receipts as trading receipts and included the same in the total income. For the assessment year 1971-72, for similar reasons, he added the amount of Rs. 40,570 in the total income of the assessee.

2. Aggrieved, the assessee filed appeals against these orders. The AAC accepted the assessee's contention and held that the disputed amounts did not constitute the assessee's income for the aforesaid respective years and hence deleted the same. From that decision, the revenue filed three appeals before the Income-tax Appellate Tribunal.

3. The Appellate Tribunal, relying on the decision of the Supreme Court in Chowringhee Sales Bureau P. Ltd. v. CIT : [1973]87ITR542(SC) and Sinclair Murray and Co. P. Ltd. v. CIT : [1974]97ITR615(SC) and that of this court in CIT v. Sheo Nath Prasad Hari Kishan : [1974]93ITR282(All) , held that the disputed receipts constituted trading receipts of the assessee and even though the assessee had been disputing its liability to pay the purchase tax to the State Govt. these receipts were liable to be added in its total income. According to the Tribunal, the unilateral act of the assessee of making credit entries in the accounts of the customers in its books was not of much consequence. For these reasons, the addition of these amounts in these three assessment years respectively was restored. The assessee's contention that in view of the decision of the Supreme Court in Kedarnath Jute Mfg. Co. Ltd. v. CIT : [1971]82ITR363(SC) , the question for consideration was as to whether the amount claimed by the assessee as a deduction on account of sales tax payable by it was deductible as business expense, was repelled on the ground that the assessee had not claimed any such deduction and the only question for consideration in these cases was whether the disputed amounts constituted its trading receipts or not. The Tribunal, accordingly, allowed the appeals of the department and restored the order of the ITO in regard to the addition of the aforesaid amounts for the aforesaid three years respectively.

4. Now, at the instance of the assessee, the Appellate Tribunal has referred the following questions of law to us :

'1. Whether, on the facts and in the circumstances of the case, the assessee was entitled to claim exemption on the purchase tax collected by it in the computation of income, profits and gains of the assessee for the assessment years 1968-69, 1969-70 and 1971-72 ?

2. Whether, on the facts and circumstances of the case, the finding of the Income-tax Appellate Tribunal in the present cases that the assessee did not claim any deduction on account of its sales tax liabilityand the only question for consideration in these cases is whether the amount in question constituted trading receipts of the assessee or not is perverse ?'

5. Question No. 1 is not happily worded. The assessee had not claimed exemption in respect of purchase tax realisations but it had claimed deduction in respect of the same for the reason that it was a statutory liability as the assessee was to pay the purchase tax realised to the State Govt. Therefore, in question No. 1, in respect of the expression 'exemption', we would read the expression 'deduction'. As for question No. 2 as well, it has not been properly framed inasmuch as the assessee had not claimed deduction on account of its sales tax liability but had claimed deduction on account of its purchase tax liability. We, therefore, reframe the questions as under :

'1. Whether, on the facts and in the circumstances of the case, the assessee was entitled to claim deduction in respect of the purchase tax realisations made by it, from the computation of its income, profits and gains for the assessment years 1968-69, 1969-70 and 1971-72 ?

2. Whether, on the facts and in the circumstances of the case, the finding of the Income-tax Appellate Tribunal that the assessee had not claimed any deduction in respect of its purchase tax liability and the only question for consideration in these cases was whether the amounts in question constitute the trading receipts of the assessee or not is perverse ?'

6. Both the questions may be taken up together. It is not disputed that the assessee follows the mercantile system of accounting. It realised from its customers the disputed three amounts in the three assessment years under consideration respectively by way of purchase tax. It does not admit of any doubt that these realisations amounted to trading receipts of the assessee and were liable to be included in its total income. Reference may be made for this purpose to the decisions of the Supreme Court in Chowringhee Sales Bureau P. Ltd. v. CIT : [1973]87ITR542(SC) and Sinclair Murray and Co. P. Ltd, v. CIT : [1974]97ITR615(SC) and that of this court in CIT v. Sheo Nath Prasad Hari Kishan : [1974]93ITR282(All) . These decisions are on the question of sales tax realisations. It is not disputed that the nature of purchase tax realisations is the same as that of sales tax realisations. Therefore, the disputed realisations were trading receipts of the assessee.

7. The question, however, arises as to whether the assessee could claimdeduction in respect of its purchase tax liability. It is not in disputethat the assessee follows the mercantile system of accounting and that itwas its statutory liability to pay the amounts realised by way of purchasetax to the State Govt.

8. The Appellate Tribunal repelled the contention of the assessee mainly for the reason that the assessee did not claim any deduction in respect of this liability. According to the Tribunal, the only question for consideration in these cases was whether the amounts in question constitute the trading receipts of the assessee or not. We find that the Tribunal erred in taking this view because in grounds Nos. 4 and 5 taken in the grounds of appeal before the AAC, it was specifically contended that the purchase tax collected by the assessee was to be paid by it to the State Govt. The AAC accepted this contention of the assessee and deleted the additions made on this account. It was the department which had come up in appeal before the Appellate Tribunal from the order of the AAC and when the assessee as respondent before the Tribunal claimed deduction on account of its purchase tax liability, it could not be said that the assessee was advancing any fresh claim for the first time before the Tribunal. If the Appellate Tribunal had taken care to go through the order of the AAC, it would have found that the assessee had in fact made such a claim. Therefore, there is no basis whatsoever for saying that the claim of deduction on account of its purchase tax liability had not been raised by the assessee.

9. Now, coming to the merits of the claim, we find that the view taken by the AAC was absolutely correct while the one taken by the Appellate Tribunal is erroneous in law. As noted above, the assessee follows the mercantile system of accounting. It may be that the assessee was disputing its liability to pay the purchase tax to the State Govt. and had not made any debit entry in its books of account. It is on record that when the assessee lost its case finally, it debited the amounts to the accounts of the customers and made payments to the State Govt. Those payments ' were, of course, made in the subsequent years, but that will not make any difference because it is the accrual of the liability under the mercantile system of accounting which would decide the question of its deduction. Reference may be made to the decision o the Supreme Court in Kedarnath Jute Mfg. Co. Ltd. v. CIT : [1971]82ITR363(SC) . In that case, the assessee-company followed the mercantile system of accounting and incurred a liability on account of sales tax, determined by the sales tax authorities to be payable, on the sales made by it during the calendar year 1954, being the previous year relevant to the assessment year 1955-56. The sales tax demand was raised pending the income-tax assessment for that year. The ITO rejected the assessee's claim for a deduction of that amount on two grounds : firstly, that the assessee had contested the sales tax liability in appeals and, secondly, that it had made no provision in its books with regard to the payment of that amount. The appeals to higher authorities or courts taken by the assessee, contesting its liability to pay the sales tax, ultimately failed. On these facts, the view taken by the court wasthat the moment the dealer made either purchases or sales which were subject to sales tax, the obligation to pay the tax arose. Although that liability could not be enforced till quantification was effected in assessment proceedings, the liability for payment of tax was independent of the assessment. The assessee, which folio wed the mercantile system of accounting, was entitled to a deduction, from the profits and gains of its business, of the liability to pay the sales tax which arose on the sales made by it during the relevant previous year. It was further held that the fact that the assessee was contesting its liability to pay the sales tax or that it failed to debit the liability in its books of account did not debar it from claiming the same as a deduction either under Section 10(1) or under Section 10(2)(xv) of the Indian I.T. Act, 1922.

10. It is, therefore, established that as to whether the assessee was entitled to a particular deduction or not would depend upon the provision of law relating thereto and not on the view which the assessee might take of its liability, nor can the existence or absence of entries in its books of account be decisive or conclusive of the matter.

11. Thus, the assessee, who followed the mercantile system of accounting was entitled to a deduction, from the profits and gains of its business, of the liability to purchase tax, which arose on the purchases made by it during the relevant previous years.

12. We, therefore, answer question No. 1, as reframed by us, in the, affirmative, in favour of the assessee and against the department and question No. 2 in the affirmative, in favour of the assessee and against the department. The assessee is entitled to costs which we assess at Rs. 250.